A new market consensus has emerged recently that the "double dip" scare of July and August was just a bad dream. The 2010 double dipper was upended not by signs of sustainable improvements in unemployment, housing and credit but by a man named Ben who said the Fed will do “all it can” to ensure the U.S. economic recovery.
However, warning signs abound that the U.S. economy is fundamentally weak. Front and center is Treasury Secretary Timothy Geithner asserting that Washington is at risk of undercutting an already sluggish economic recovery if it fails to provide quick, additional support to businesses and individuals. When government action is required to sustain a recovery, many would argue that what you have is an economic contraction rather than a recovery. Consistent with this outlook, the ECRI (Economic Cycle Research Institute) Weekly Leading economic indicator growth rate remains weak at (10.1%). Historically, whenever this indicator has dropped below (10.0%) a recession has always followed.
In addition to this unfavorable leading economic indicator, the Consumer Metrics Institute (CMI) tracks another leading economic indicator focused on consumer expenditures. The CMI believes their Consumer Leading Indicators are more timely than most other leading indicators because they are tightly focused on the U.S. consumer. CMI's economic data is collected at the point of sale and is exclusively focused on major discretionary spending. This spending typically includes such items as automobiles, housing, vacations, durable household goods and investments. It excludes non-discretionary spending such as groceries, fuel and utilities. CMI believes that as the US consumer goes, so goes the US economy because consumer expenditures represent more than 70% of U.S. GDP.
As the following chart depicts, the CMI leading economic indicator is clearly signaling increased risk of recessionary conditions.
But if this really is a "double dip" recession, then our data indicates that the "Great Recession" of 2008 was merely the precursor, and not the main event. It is this current dip that we should be really concerned about; the current contraction in consumer demand is about structural changes in consumer behavior, whereas the "first dip" was about short term loss of consumer confidence.
This recession has been complex and constantly evolving in ways that policy makers have not been able to understand through their low resolution lenses. As a consequence their policy responses have been misguided, ineffective and wasteful. The Federal Reserve may be able to save the banking system by being the "lender of last resort," but it is powerless to change perhaps the one thing that John Maynard Keynes got right -- and what he mischaracterized as a "Paradox of Thrift" -- as over 100 million U.S. households become economic "loose cannons," acting exclusively in their own best interests in 100 million different ways.
The Paradox of Thrift is the notion that an increase in saving, which is prudent for an individual during bad economic times, is not the best course of action for the macro economy. Ben Franklin, one of our Founding Fathers wrote a number of admonitions on thrift for his working class readers of Poor Richard's Almanac. One timeless quote of Ben's with a back to the future feel was "If you know how to spend less than you get, you have the philosopher's stone." The philosophers' stone is a legendary alchemical substance, said to be capable of turning base metals, especially lead, into gold.
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